Drivers Of Millennial Individual Stock Holdings

Retail investors are notorious for making costly mistakes when managing their own accounts. Chief among these mistakes is holding too concentrated a portfolio of just 1 or 2 stocks, which significantly reduces a portfolio's Sharpe ratio relative to a diversified portfolio. While diversifying a portfolio is well-known (though sometimes unheeded) advice, retail investors can make a number of other behavioral mistakes such as buying on hype, sector concentration, and performance chasing. Here, we look at the holding patterns of the individual stocks of the S&P 500 at a U.S. retail brokerage to identify potential biases in stock selection with the goal of helping retail investors navigate pitfalls in portfolio allocation.

Robinhood is a commission-free brokerage founded in 2013 that has attracted a large number of millennial retail investors. Robinhood has grown to about 3 million users with an average user age of just 26. This compares to an average age of 51 for taxable accounts in the U.S. Recently, Robinhood has begun to report the number of investors holding each individual security on its platform. Here, we use these holdings data to look at patterns of millennial individual stock preference.

Holdings Data

The number of holders of each individual stock in the S&P 500 was extracted from Robinhood on 21 May 2018 after market close. The number of holders ranged from as low as 38 for Willis Towers Watson (WLTW) to 141,914 for Apple (AAPL). The average number of holders for each individual S&P 500 component was 4,815 while the median was 770.

Because large market cap stocks should be held more widely, the number of holders was normalized by market cap and then standardized. In this case, standardization means that a value of 0 represents the mean normalized number of holders of that stock and standard deviation is set to 1. This means that a stock with a normalized holders value of 1 is held at a rate 1 standard deviation above the mean after being corrected for market cap, and that a stock with a value of -1 is held at a rate 1 standard deviation below the mean after being corrected for market cap.

To give some color to this correction, on average a stock with a market cap of $100B had ~10,000 holders while a stock with a market cap of $10B had ~250 holders. Normalizing and standardizing the number of holders allows us to look for stocks that are relatively over- and under-held by individual investors.

The associated data file can be downloaded here: RHSP500Data.csv

Biggest Outliers in Investor Holdings

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-1527033576479354.png" alt="Under and Over-Held Stocks" width="640" height="214" data-width="640" data-height="214" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="false" data-og-image-msn="true" data-og-image-facebook="false" data-og-image-google_news="true" data-og-image-google_plus="false" data-og-image-linkdin="true"">Under and Over-Held Stocks>

Source: Wellspring

At first glance, millennial investors have a preference toward consumer-facing brands, especially those in technology. The most over-held stock in the S&P 500 is Advanced Micro Devices (AMD), which is perhaps unsurprising since it possesses many characteristics associated with retail investing: it is in the technology sector, has a low share price of ~$13, has stellar recent performance (was $2/share in 2016), and has substantial buzz on retail-oriented investing sites. For example, SA has published 69 AMD-focused articles in the past 3 months, compared to 28 for Intel (INTC), which has a market cap > 20x as large as AMD.

Other technology stocks such as NVIDIA (NVDA) and Micron (MU) fit this pattern as well, along with perennial favorites in FANG. Google (GOOG) is a bit further down the list at the 37th most over-held spot. Millennial investors also appear to have a tendency to buy stocks with large recent declines such as Ford (F) and General Electric (GE) that are likely perceived as turnarounds but have a brand they know. Perhaps they are banking on a repeat of the outsized returns of both of these stocks from the depressed levels of the financial crisis. Over-holding Disney (DIS) makes sense from a brand point of view, but it is surprising that Bank of America (BAC) is over-held when financial services companies as a whole are under-held (covered below). On the other hand, Bank of America has returned ~600% in the last 6 years and is well-covered in financial news.

Sector Preferences

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270283740375717.png" alt="Holders by Sector" width="640" height="335" data-width="640" data-height="335" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Sector>

Source: Wellspring

Individual stocks in the consumer goods, services, and technology sectors tend to be over-held by retail investors. Technology stocks are by far the most over-held at 0.7 standardized units above average, and the only sector that is over-held at a statistically significant level. Stocks in other sectors tend to be under-held, but only financial stocks are under-held statistically.

These findings align with the general impression of millennial investors as having a strong technology stock preference. Results are largely in line with the cliché of millennials only investing in FANG and related stocks, but "old tech" such as Cisco (CSCO), Intel (INTC), and HP (HPQ) are nearly as over-held.

They also likely represent an aversion to invest in financial stocks post-financial crisis, despite strengthening fundamentals and recent high returns. However, national consumer-facing banks such as Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC) are still over-held by investors. Interestingly, Navient (NAVI), one of the smallest S&P 500 components is moderately over-held in this under-held sector -- perhaps due to high familiarity from paying back student loans. Insurance companies as a whole appear particularly under-held.

A Muted Tendency for Low PE Stocks

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270298067481735.png" alt="Holders by PE" width="640" height="463" data-width="640" data-height="463" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by PE>

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270294890224955.png" alt="Holders by Forward PE" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Forward PE>

Source: Wellspring

Although there is a minor trend for retail investors to over-hold low PE stocks, there is no statistical significance when looking at either trailing or forward PE. These results come from investors of many flavors but it is notable that value investing is not the dominant regime. Surprisingly, the strength of the value effect is stronger overall for forward PE, which may stem from the relative ease it is to get forward PE estimates in today's market. Despite the impression that millennial retail investors buy technology stocks regardless of value, low PE technology stocks are the most widely over-held of any category.

Dividend Yield is a Major Factor in Holding Some Sectors

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-1527030499535317.png" alt="Holders by Dividend" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Dividend>

Source: Wellspring

Dividend yield significantly increases the tendency of investors to over-hold individual stocks. This effect is strongest for the consumer goods, healthcare, industrial goods, and services sectors (all statistically significant). Investors have only a weak preference for dividends in the financial, technology, and utilities sectors. The mild preference for high dividend utilities stocks is surprising given their reputation as dividend plays.

Millennial investors are especially under-holding no and low dividend healthcare stocks such as hospital operators Universal Health Services (UHS) and HCA (HCA), as well as diagnostics companies Laboratory Corp (LH) and Quest Diagnostics (DGX). The notable exception is biotechnology company Celgene (CELG), which millennial investors appear to be buying after its recent sharp declines and associated financial news flow.

Investors Don't Use ROE in Decision-Making:

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270308581638792.png" alt="Holders by ROE" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by ROE>

Source: Wellspring

Despite return on equity, or ROE, being as important a quick and dirty quality metric as PE is a value metric, millennial retail investors do not use ROE to make investment decisions. PE is one of the first (and often only) metrics that retail investors utilize.

Investors Like Low Price Per Share

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270310127033632.png" alt="Holders by Price" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Price>

Source: Wellspring

Investors are sensitive to the quoted share price of a stock, preferring to hold stocks with a low price per share regardless of sector. This effect is actually somewhat muted in the technology sector, which probably results from the over-holding of Alphabet (GOOG) and Amazon (AMZN). High share price may partly explain under-holding of stocks like Mettler-Toledo (MTD), The Cooper Companies (COO), Mohawk Industries (MHK), and Essex Property Trust (ESS). All four of these companies trade above $200/share and are among the top 20 most under-held stocks in the S&P 500.

Volatility Preferences Vary by Sector

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270291320251987.png" alt="Holders by 3 Year Beta" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by 3 Year Beta>

Source: Wellspring

Across S&P 500 stocks, investors have no preference for either high beta or low volatility. Some sector-specific differences are apparent, however. Investors over-hold high beta technology stocks relative to low beta ones. Investors have a preference for holding low beta consumer goods and services stocks. Interestingly, there is no preference for low beta utilities stocks.

Performance Chasing is Sector-Specific

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270312417370365.png" alt="Holders by Month Return" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Month Return>img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-1527031255781736.png" alt="Holders by YTD Return" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by YTD Return>

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270312731260774.png" alt="Holders by Yearly Return" width="640" height="410" data-width="640" data-height="410" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by Yearly Return>

Source: Wellspring

Across all stocks, millennial retail investors are not chasing performance. Performance chasing is most apparent in technology and financial stocks. There is no clear pattern on what time frame (month, YTD or year) investors are most sensitive to, although technology sector performance chasing is most apparent using the 1 year time frame.

Partly explaining this trend may be a bifurcation of investors where performance chasers tend to pile into the best performing stocks of the best performing sectors (technology and financials) while bottom fishers try to buy the worst performing stocks in the worst performing sectors (consumer goods).

Investors Buy Stocks With the Highest Buzz, Good or Bad

img src="https://static.seekingalpha.com/uploads/2018/5/22/1795411-15270316790681622.png" alt="Holders by News" width="640" height="463" data-width="640" data-height="463" data-og-image-twitter_small_card="true" data-og-image-twitter_large_card="true" data-og-image-twitter_image_post="true" data-og-image-msn="true" data-og-image-facebook="true" data-og-image-google_news="true" data-og-image-google_plus="true" data-og-image-linkdin="true"">Holders by News>

Source: Wellspring

The most startling result is how much the amount of buzz a stock is getting (here as measured by the amount of primary SA articles over the past 3 months) relates to its over-investment by millennial retail investors. Stocks with a high percentage of the news flow (> 0.5%) are heavily over-held relative to their market capitalization. Many stocks with zero or near-zero recent news coverage have less than 100 or 200 holders on Robinhood, which is remarkably low even without adjusting for market cap.

There does not appear to be any relationship between how favorable or unfavorable SA articles are and the degree of under- and over-holding by investors. The implication here is not that SA is influencing stock holdings, but that the amount of the general buzz around a stock (good or bad) is a huge influence on whether investors buy a stock. For example, the financial press has generally been hugely negative about General Electric (GE) but it is still one of the most over-held stocks (and most over-held industrial) among millennials.

Takeaways for the Retail Investor

  1. Retail investors should ask themselves why they are investing in an individual stock. Is it due to recent headlines, brand familiarity, trying to buy after large up or down moves, or on the basis of fundamental analysis?
  2. Look at valuation and quality metrics beyond PE, dividend yield, and especially price per share.
  3. Give companies out of the limelight a hard look -- you'd be in limited company among retail investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source : https://seekingalpha.com/article/4176702-drivers-millennial-individual-stock-holdings

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